Unlike during its industrial glory days, Milwaukee trails many areas on business start-ups. If the region wants something transformative like a Microsoft, it needs optimistic, risk-taking entrepreneurs.

Journal Sentinel business reporter Rick Romell produced this special report during a six-month fellowship established by the Law School.

April 13, 2013

Part one of four

Charlie Hillman is a classic baby boomer. Jalem Getz is Generation X.

Hillman finished at the top of his high school class, graduated from the Massachusetts Institute of Technology and for good measure, later got himself a master's in engineering. He's a trim 61, with a shock of white hair, a toothy smile and the button-down look of an earnest guidance counselor.

Getz is 40, dark and tall, and has a taste for Italian sports cars. He used to drink a lot of Mountain Dew, and still rocks with AC/DC. His formal education ended in junior college.

The furnishings in Hillman's office, on the lower level of a bank building in West Bend, include Green Bay Packers pennants and textbooks on calculus, algorithms and descriptive geometry. Next to Getz's desk, in an industrial-chic space in the heart of Milwaukee's Third Ward, is an electric skateboard.

But what binds these two runs deeper than differences of age, generation and style. It emerged when each was young and never disappeared.

Hillman was the kid who cut lawns, shoveled snow and got up at 4 a.m. to deliver the Milwaukee Sentinel - at a time when newspaper routes were valuable enough that you bought them like taxi licenses. If the Boy Scouts were selling Christmas wreaths, they could count on Hillman to rack up big numbers.

"I'm not that great of a salesman," he said. "But I'd get out there."

The young Getz was no fan of manual labor. But when it came to dreaming up ways to make money, the wheels never stopped turning. He was 15 when he sensed opportunity in a cool but underperforming local bike shop, and went one step further: He presented his parents with a business plan to buy it.

"I told my mom I would wash dishes if she would listen to my pitch," he said. "I was washing the dishes as she listened to it and I worked through the mechanics of how to put it together. And they did - they bought it . . . turned the business around, had great incomes for themselves and then sold it for a profit."

Hillman and Getz are entrepreneurs - the risk-taking, optimistic, if-at-first-you-don't-succeed businesspeople who get things rolling.

Both have experienced success. They've started firms, built them, sold them. Both have current ventures they're trying to steer toward bigger things.

For Hillman, whose roots tap into the old-line Milwaukee-area manufacturing economy that innovative firms like his may one day replace, it's a software outfit with technology that helps the elderly age in their own homes. For Getz, whose previous company, BuySeasons Inc. now employs hundreds, it's an e-commerce start-up offering women "curated" makeup and accessories.

Local investors believe they will succeed again. But even if they don't, what they and others like them are doing is more vital for the region's economic health than many realize.

In some ways the Milwaukee area has been holding its own. But wage growth has lagged behind that in most large metro areas over the last three decades and has been just average in recent years. The flow of venture capital is little more than a trickle. Start-ups haven't been a prominent feature of our economic landscape. And an important part of the area - the center of Milwaukee - remains strapped by poverty.

If the Milwaukee area is to flourish in an ever-shifting economy that has fractured our industrial foundation, we can use a lot more Jalem Getzes and Charlie Hillmans.

Entrepreneurs' role vital

There are many paths to economic growth, all with their advocates.

There's the cluster approach, which taps the benefits of tight geographic groupings of similar types of businesses. There's the idea of dangling incentives to lure companies from elsewhere, which is great if your incentives trump your opponents' but in the aggregate creates as many losers as winners. There's human capital theory, probably the leading school: Attract lots and lots of smart folks to one place and watch the good things happen.

But many scholars and businesspeople believe the spark for growth comes from the entrepreneur.

The view isn't unanimous. This is social science, not physics, and some question the contribution of new-business formation. Economist Scott Shane of Case Western Reserve University, for example, writes that typical start-ups are not the source of economic vitality or job creation, and cites data to support his case. Places with lots of start-ups tend to have fewer high-growth companies, and vice versa, he said in an interview.

Other studies and other economists, though, see things much differently and support their views with data of their own. Some go so far as to say that start-ups provide all net new jobs.

For the most part, that's true - but with an asterisk. It glosses over the high volatility of the youngest firms, many of which fail within a few years, meaning those new jobs are quickly lost.

All the same, scholars such as Edward Glaeser of Harvard, David Audretsch of Indiana University and Randall Holcombe of Florida State speak of the vital role entrepreneurs play in economic growth.

"Entrepreneurship is where the new ideas come from that produce economic progress," Holcombe said. "If you didn't have any entrepreneurs, everything would be the same next week as it is this week, same next year as it was last year. Economic progress would come to a halt."

Amid the churning volatility, the start-ups that succeed bring not just jobs but transformation.

University of California, Berkeley economist Enrico Moretti has pointed out that Seattle wasn't particularly prosperous in 1979, the year native sons Bill Gates and Paul Allen moved then-tiny Microsoft to the area. Median household income in metropolitan Seattle was dead even with metro Milwaukee's. Today the Seattle median is 26% higher - a difference of more than $13,000 - thanks in no small part to a single start-up that succeeded wildly at the very time Milwaukee's manufacturing economy was shedding tens of thousands of jobs.

"Firms that survive and grow tend to be more productive than the ones they're displacing," said Javier Miranda, principal economist at the U.S. Census Bureau's Center for Economic Studies. "Businesses that don't reinvent themselves, that are less productive, will exit the economy."

This, he said, is all part of the endless cycle of "creative destruction" that arises from innovation and leads to higher standards of living. The dynamic is wrenching - most so for those who came of age when a person could reasonably expect to spend decades with a single employer.

The young realize those days are gone.

Student interest in entrepreneurship is "definitely increasing," said John Peterson, who teaches the discipline as an adjunct professor at Marquette University. The school added an entrepreneurship minor in 2011, and many students combine those courses with other academic pursuits, "understanding that the world is changing and that the traditional career paths often don't exist," Peterson said.

That's not to say that large and venerable companies can't grow, create jobs and become more productive. But every business, no matter how large or how old, had a beginning. And at the beginning was an entrepreneur.

Harry Quadracci's first printing plant in 1971 wasn't much bigger than a Walgreens store. It had eight employees. Today, Quad/Graphics' buildings cover more than 600 acres on three continents and are staffed by 25,000 people - 6,700 of them in Wisconsin.

Getz helped build BuySeasons Inc. into one of Milwaukee's fastest-growing companies of the last decade. What is now the world's largest Internet costume retailer had its origins in a bare-bones office above a Subway in Waukesha.

Hillman and his wife, Gaytha, along with daughter Laura Mitchell and her husband, Nick, nursed their latest venture for seven lean years filled with red ink. But now the company, GrandCare Systems LLC, has a promising contract in hand, profitability in sight and the likes of GE Healthcare taking notice.

Nothing happens until somebody starts something.

Innovation lagging

If entrepreneurship is indeed critical to economic vitality, how do Milwaukee and Wisconsin fare? Middling, at best.

The state ranks among the lowest in relative number of jobs at young firms - an indicator of entrepreneurial activity.

In terms of capturing federal grants intended to help small businesses commercialize the results of research - one measure of potentially valuable innovation - Wisconsin as a whole is about average. Milwaukee does poorly. Nearly three-quarters of the awards in the state have gone to Dane County entities. Metro Milwaukee, with an economy more than two and a half times as large but without the state's flagship research university, has won less than a fourth of Dane County's total.

Every major metropolitan area generates some research and development across its array of companies, universities and hospitals. But how much of that research generates new businesses?

Economist Joshua Rosenbloom of the University of Kansas offers some perspective. Using data from 1996 to 2003 on patents, research grants, venture funding and initial public offerings, he devised an index to rank the 50 largest metropolitan areas not just on how well they innovate but also on how well they commercialize those innovations.

Milwaukee's rank: 49. We beat Las Vegas.

Or consider the annual Consumer Electronics Show in Las Vegas, where in January Hillman climbed onto a step stool in front of GrandCare's booth and told scores of invited media and other guests, virtually all of them sipping free beer from the company, that the little West Bend firm had signed its biggest contract ever.

The Consumer Electronics Show is huge - 3,000 exhibitors, 150,000 tech-industry participants, nearly 2 million square feet. It showcases a relatively narrow but forward-looking segment of the economy - gizmos such as forks that vibrate when you eat too quickly, gyroscopically balanced electric unicycles and TVs so sharp you can count the pores on an actor's skin.

This year, GrandCare was among nine Wisconsin firms exhibiting. Minnesota had 21. Illinois, with just over twice Wisconsin's population, had five times as many exhibitors.

Industrial glory days

In the late 19th century, as the nation's economy transitioned from agriculture to manufacturing, Milwaukee responded not just with muscle but with entrepreneurial vigor.

The Milwaukee Sentinel used to present an annual tally of the city's manufacturing output. The paper took a broad view - the count included cigar makers and shoe-repair operations, for instance. But the level of business dynamism was clear. In just one year, 1900, Milwaukee added 821 manufacturing establishments and factory employment increased by 6,300 - up 10%.

The plants fed off one another in a sum-is-greater-than-the-parts phenomenon economists call an "agglomeration effect."

As historian John Gurda describes it, this was especially intense in one small slice of Walker's Point. The neighborhood just south of downtown was a petri dish of entrepreneurial fertilization, and the results for the city were profound.

Over 18 years, an area of just a few blocks saw the birth of several firms - Harnischfeger Corp., Nordberg Manufacturing, Rex Chainbelt, Allen-Bradley, Kearney & Trecker - that would undergird Milwaukee's industrial foundation for decades. A.O. Smith began making auto frames in the same neighborhood. The already-well-established forerunner of Allis-Chalmers was there, too.

"Silicon Valley of the late 20th century was not that much different from the Upper Midwest of the late 19th, early 20th," Gurda said. "The same kinds of things, the sort of zeitgeist, energy, the whole clustering thing.

"Take a guy like E.P. Allis. He starts what becomes Allis-Chalmers, and you have all these employees, suppliers, customers - it becomes sort of this round of self-generating energy. (Henry) Harnischfeger did work for (Bruno) Nordberg, and Nordberg had been a draftsman for Allis. And then another Allis engineer named (Robert)Shaw invents the overhead crane, and Harnischfeger starts to make it, and they make that their specialty. It's like all these things kind of reinforcing each other, playing off each other, kind of like a chain reaction."

Importantly, Gurda said, the region also had the wind at its back. The United States was becoming an industrial superpower, with the Great Lakes states driving much of the growth. Air conditioning hadn't yet opened up the South, and the challenge from Asian manufacturing was decades away.

Times changed. Milwaukee, not so much.

"We were sort of a victim of our own success," said Dan Steininger, co-founder of the nonprofit BizStarts Milwaukee. "Milwaukee became one of the manufacturing centers of the world. . . .

"That became our habit. We relied on the big giants to carry us along when the rest of the world was moving on."

The ride ended in the early 1980s.

Since then, once-thriving firms such as Allis-Chalmers, Briggs & Stratton, A.O. Smith/Tower Automotive, Kearney & Trecker, Delco Electronics/Delphi, Cutler-Hammer and Pabst all have disappeared from Milwaukee or been greatly diminished as the metropolitan area went on to shed roughly 100,000 manufacturing jobs.

Now Steininger is among people pushing for something new - a mind-set that embraces risk and is driven to succeed but doesn't fear failure.

It's the sort of mentality that local angel investor Jeff Rusinow, a former Kohl's Corp. executive who became BuySeasons' main financial backer, sensed in Jalem Getz the first time they met, sitting on lawn chairs in Rusinow's front yard.

"I could tell this was a very talented guy who could help me make a lot of money," Rusinow said. " . . . He's smart, he was relentless and he was hungry."

Much the same could be said of Hillman. Getz wasn't yet 30 when he helped launch BuySeasons. Hillman started GrandCare in his mid-50s. And the considerable savings he and his wife have sunk into the firm from their previous successes could have helped guarantee a very comfortable retirement had they decided to play it safe.

But Hillman has a firm belief in what his company is doing, and something that, for an entrepreneur - or anyone building for the future - is equally valuable: a positive outlook.

"Oh, of course," he said when asked about it, sounding as if he couldn't believe anyone would even pose the question.

"I would not be in this business if I were not probably a ridiculous optimist."